HW2 - Problem Set 2 FINA 4200 Spring 2010 Due Thursday...

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Problem Set 2 - FINA 4200 Spring 2010 Due Thursday February 4 before class I. Multiple Choices Chapter 8 1. Since ROA measures the firm's effective utilization of assets (without considering how these assets are financed), two firms with the same EBIT must have the same ROA. a. True b. False 2. If the current ratio of Firm A is greater than the current ratio of Firm B, we cannot be sure that the quick ratio of Firm A is greater than that of Firm B. However, if the quick ratio of Firm A exceeds that of Firm B, we can be assured that Firm A's current ratio also exceeds B's current ratio. a. True b. False 3. We can use the fixed assets turnover ratio to legitimately compare firms in different industries as long as all the firms being compared are using the same proportion of fixed assets to total assets. a. True b. False 4. A firm which has an equity multiplier of 4.0 will have a debt ratio of a. 4.00 b. 3.00 c. 1.00 d. 0.75 e. 0.25 1
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5. Which of the following alternatives could potentially result in a net increase in a company's free cash flow for the current year? a. Reducing the days-sales-outstanding ratio. b. Increasing the number of years over which fixed assets are depreciated. c. Decreasing the accounts payable balance. d. All of the answers above are correct. e. Answers a and b are correct. 6. Which of the following statements is most correct? a. If Firms A and B have the same level of earnings per share, and the same market to book ratio, they must have the same price earnings ratio. b. Firms A and B have the same level of net income, taxes paid, and total assets. If Firm A has a higher interest expense, its basic earnings power ratio (BEP) must be greater than that of Firm B. c. Firms A and B have the same level of net income. If Firm A has a higher interest expense, its return on equity (ROE) must be greater than that of Firm B. d. All of the answers above are correct. e. None of the answers above is correct. 7. A firm has a profit margin of 15 percent on sales of $20,000,000. If the firm has debt of $7,500,000, total assets of $22,500,000, and an after-tax interest cost on total debt of 5 percent, what is the firm's ROA? a. 8.4% b. 10.9% c. 12.0% d. 13.3% e. 15.1% 8. Perry Technologies Inc. had the following financial information for the past year: Inventory turnover = 8 Quick ratio = 1.5 Sales = $860,000 Current ratio = 1.75 What were Perry’s current liabilities? a. $430,000 b. $500,000 c. $107,500 d. $ 61,429 e. $573,333 2
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9. Kansas Office Supply had $24,000,000 in sales last year. The company’s net income was $400,000. Its total assets turnover was 6.0. The company’s ROE was 15 percent. The company is financed entirely with debt and common equity. What is the company’s debt ratio? a. 0.20
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HW2 - Problem Set 2 FINA 4200 Spring 2010 Due Thursday...

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